California Apparel News

California apparel business owners can expect to see workers’ compensation rate increases over the next three years, with some observers saying increases may be as high as 50 percent over the next two years.

Assembly Bill 749 (AB749) which Governor Gray Davis signed into law earlier this year, will go into effect January 2003, ushering in higher medical and indemnity costs and an increase in workers’ comp benefits.

By the time AB749 is fully implemented in 2006, it could increase employers’ costs by 22.8 percent, according to Jack Hannin, a spokesperson for the Workers’ Compensation Insurance Rating Bureau (WCIRB) in San Francisco, who said that employers will likely see their rates rise 5.9 percent next year.

Hannin said the bureau estimates the total benefits paid to workers will increase to $3.2 billion by the time AB749 is fully implemented in 2006.

Changes in workers’ comp legislation stem from the mid-1990s, when the state eliminated a law that set minimum rates for workers’ comp carriers. This led insurers to price their own coverage below their cost to gain market share from rivals. As a result, several insurance carriers went out of business or left the state.

“The days of cheap rates are over,” said Bill White, chief executive officer and president at Alliance Insurance Services, an insurance carrier for several Los Angeles–area apparel companies.

And, the apparel industry isn’t alone. Other industries, such as roofing contractors, agriculture companies and restaurants, have seen rate increases of nearly 200 percent.

Bob Reed, president of Stitches Inc., a sewing contractor in Los Angeles, has watched his workers’ comp costs soar 100 percent since last year to $65,000 annually.

The proposed rate increases in AB749 only heighten apparel business owners’ concerns about remaining in business.

“We’re all hanging on by a thread,” said Reed. “For many of us, it’s a seasonal business in which we’re all trying to steady work to pay the bills.”

Jimmy Macias, owner of Ja-Mar Apparel Manufacturing Co. in Los Angeles, said he hopes the increase will be minimal. He said his workers’ comp rates have increased 100 percent over the past two years.

The industry is abuzz with options to alleviate the high costs of insurance, including hiring temps to avoid paying workers’ comp coverage.

“The markup structure in the apparel industry isn’t compatible with these kinds of radical workers’ comp increases,” said Reed.

Some apparel business owners say they have been able to keep costs at a manageable level by minimizing work place accidents thus increasing the employer’s insurance ratings and helping to mitigate insurance costs.

“The only way to beat the insurance company at their own game is to operate your business safely,” said Reed.

Some industry sources complain that the increased weekly benefit payments—which some say will be almost equal to a worker’s regular pay—will entice some employees to make fraudulent claims.

Insurance rate hikes are only one of the challenges California businesses are facing, according to Hannin, who pointed to rising medical costs and a slowing economy as other factors affecting business in the state.

And within the apparel industry, domestic manufacturers continue to struggle to compete against offshore production in countries where employment is a fraction of the cost for domestic work, said White, who added that these factors mostly affect momand- pop companies that end up folding because of mounting expenses.

Fewer Insurers

The number of workers’ comp carriers has dwindled down to just a few major insurers, and only a handful of them will take on apparel-related liabilities, said White.

Approximately 18 apparel insurance carriers have shuttered over the past two years alone, including Legion, HIH Superior National, Great States, Reliance, Pacific Rim and Calcomp, to name a few.

White said about 60 clients were scheduled to renew their policies in this month. However, 14 of those companies failed to renew because they went out of business.

Hannin expressed doubt that increases would halt anytime soon.

“We don’t expect this trend to go away,” he said. “We can plan on seeing similar increases over the next couple of years, but maybe they won’t be as big as the ones we’ve had over the last couple of years. We’re always looking closely at the data as it comes in.”